On April 22, 2015, the Financial Accounting Standards Board (FASB) issued a proposed Accounting Standards Update (ASU) intended to improve existing standards for financial statement presentation by not-for-profit organizations (NFPs).
The FASB initiated a project as part of its ongoing review of GAAP standards to ensure they continue meeting the needs of a changing financial reporting environment. For the most part, the current reporting guidance was established in 1993, when the Board issued FASB Statement No. 117, Financial Statements of Not-for-Profit Organizations. The proposed ASU and a FASB in Focus overview are available at www.fasb.org.
The FASB’s Not-for-Profit Advisory Committee (NAC) and other stakeholders told the Board that while existing standards for financial statements of NFPs are sound, they could be improved to provide better information to donors, creditors and other users of financial statements.
The proposed ASU would affect substantially all NFPs as well as creditors, donors, grantors and others that use their financial statements. Those NFPs typically include charities, foundations, private colleges and universities, nongovernmental health care providers, cultural institutions, religious organizations and trade associations, among others.
The proposed ASU focuses on improving the current net asset classification requirements and information presented in financial statements and notes that are useful in assessing an NFP’s liquidity, financial performance and cash flows. More specifically, it addresses the following issues raised by stakeholders:
The proposed ASU would:
Require NFPs to present on the face of the statement of financial position the amount for each of two classes of net assets—net assets with donor restrictions and net assets without donor restrictions—as opposed to three.
Retain current requirements to provide information about the nature and amounts of different types of donor-imposed restrictions, and also require similar information about governing board designations, highlighting the importance of information about how those restrictions and designations affect the use of resources, including their liquidity.
Change how the underwater amounts of donor-restricted endowment funds are classified; those amounts would be classified in net assets with donor restrictions. The proposed ASU would also require disclosure of the aggregate amount by which the funds are underwater, the original gift amount (or amount required to be maintained by the donor or law) and any governing board policy or decisions to spend, or not spend, from such funds. The latter could also help in assessing liquidity.
The proposed ASU includes some specific requirements directed at improving a financial statement user’s ability to assess an NFP’s liquidity and how it is being managed by the NFP. Specifically, the proposed ASU would require the disclosure of both quantitative and qualitative information about the liquidity of assets and near-term demands for cash as of the reporting date, including:
The proposed ASU would require:
The proposed ASU would require two fundamental changes to increase the understandability and usefulness of the statement of cash flows:
Net Asset Classifications
The Board believes that requiring only two (rather than three) classes of net assets (and changes in them) to be presented on the face of financial statements will reduce complexity in financial reporting and increase the understandability of the information provided. This is especially true because changes in laws now allow organizations, within the bounds of prudence, to spend from a permanently restricted endowment even though the fair value of the fund may have fallen below the endowed gift amount. Additionally, enhanced disclosures would provide information about limits placed on net assets by governing boards and donors.
Statement of Activities
Requiring all NFPs to present more standardized intermediate measures of operations would be helpful in communicating the financial performance of NFPs in ways that are more comparable—and thus more understandable—to creditors, donors and other external users. The proposed requirement for a subtotal before internal transfers resulting from governing board actions should result in greater comparability across the many diverse types of NFPs and may also be useful to governing boards and managers of NFPs in benchmarking their financial performance to peers within their industries. The reporting of internal transfers after that subtotal and within operations would enable NFPs to better “tell their financial story” by providing important information about how the NFP is managed.
The reporting of expenses by both their function and nature will add information useful to creditors, donors, grantors and others in understanding an NFP’s expenses and in assessing (1) the degree to which they are fixed or discretionary, (2) how the related resources are being allocated and (c) the costs of the services provided.
The reporting of investment return net of related expenses would provide a more comparable measure of investment return across all NFPs, regardless of whether their investment activities (1) are managed by internal staff, outside investment managers, volunteers or a combination or (2) employ the use of mutual funds, hedge funds or other vehicles for which management fees are embedded in the investment return of the vehicle.
Cash Flows
Requiring an NFP to present operating cash flows using the direct method would increase the understandability of information about cash flows and its usefulness to an NFP’s creditors, donors and other users, including members of its governing board. Moreover, no longer requiring those cash flows to be presented using the indirect (reconciliation) method would eliminate the costs to provide and explain information that often is found to be confusing and misunderstood by some users of NFP financial statements.
Reclassifying items reported in a cash flow statement to better align them with this Update’s proposed notion that operating activities reported in the statement of activities—which is based on whether “resource inflows and outflows are from or directed at carrying out an NFP’s purpose for existence”—is expected to increase understandability and also help communicate financial performance.
Enhanced Disclosures
Requiring enhanced disclosures would improve the usefulness of information helpful in assessing a number of areas, among them:
The effective date, and whether it should be the same for all NFPs, as well as whether early adoption would be permitted, will be determined by the Board after considering stakeholders’ feedback on this proposed Update.
What Kind of Feedback is the Board Seeking from Stakeholders?
The Board invites individuals and organizations to review and comment on all matters in this proposed ASU—particularly on questions for respondents, including suggesting alternatives that might increase the expected benefits, minimize complexities and reduce costs. Instructions on how to submit comments are contained in the proposed ASU. All written comments are requested by August 20, 2015.
Interested parties may submit comments in one of three ways:
Do not send responses by fax. All comments received are part of the FASB’s public file. The FASB will make all comments publicly available by posting them to the online public reference room portion of its website. An electronic copy of this Exposure Draft is available on the FASB’s website.
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